Impressed by yesterday’s breakout? No, not really! In fact, I think you should short the pants off it.

I may as well start the column with the question everyone is asking me.

“If everything is as bad as you guys say, if the shoots are all shriveling, if banks are all screwed, if the technicals are calling for a whopping breakdown, why is the Dow breaking out?”

Are things really better all around than your erstwhile bearish correspondents have been telling you?

The simple answer is “no, it’s not.” And also, “no, they’re not.”

Facts vs. Slogans

Let’s address that second denial first.

As much as the cheerleading squad might wish to muddle the issues, the basic facts of the matter remain quite clear. Every honest economist concedes that the recession will continue through the rest of 2009 and into 2010.

We have become so numb to the word recession that many investors have apparently forgotten what all this means. So I am afraid I must review it here: It means that the economy has been shrinking for at least two quarters, and will most probably continue to shrink for another two or three quarters at minimum!

Not growing. Not leveling off. Been shrinking… still shrinking… gonna keep on shrinking. And what does a shrinking economy mean?

Less Is NOT More

Businesses are doing less business, and are making less money. Yes, yes, I know: Goldman Sachs made a mint in the last quarter. Before you beat me up about that, you ought to look into how they did it.

A huge chunk of those profits came from helping other banks raise cash by diluting shareholder value, for which they earned millions if not billions in commissions. Now by definition, each and every one of those banks’ shares is automatically worth less.

Oh and those commissions? They may show up as black ink on GS’s books. But they are red ink on everyone else’s. In plain English: Goldman’s good times do not, I repeat DO NOT automatically carry into the rest of the sector. In fact, just the opposite!

And yet the Financial Sector is up some 13% on this news.

Hmmm. Sounds like a classic “wisdom gap” to me.

Losses Are NOT Gains

As for the mighty, mighty Intel, whose supposed “rebirth” is powering up not just the tech sector, but all of retail? Let’s take a look at that rebound.

The headlines all point to $1 billion in profits. But when you parse it out, these “gains” evaporate faster than a puddle on a hot summer sidewalk.

• In point of fact, top line sales are off 15% compared to the same quarter in 2008, and bottom line profits are down some 38%.
• On top of that slide, Intel has to shell out $1.45 billion in antitrust fines to the European Union.
• This whopping traffic ticket drives Intel’s bottom line into the red for the first time since 1986, to the tune of 28 cents a share LOSSES.

Not gains the gains all the headlines are touting.

Losses.

The Truth Hurts

Other players in the sector have been more honest about this. Mike Dell said outright that PCs hadn’t found their bottom yet. Dell shares were punished 15% for his honesty. But tech as whole has risen more than 6% over the past few days.

Again, we see a wisdom gap.

But the biggest fib, the biggest gap and the biggest opportunity just has to be over in Retail.

Beyond the Wall of Worry: The Pit of Unemployment

As clearly demonstrated by the actual numbers, the economy is still shrinking. Whether it’s the egg, chicken or both at the same time, unemployment continues to set record highs.

So it should come as no shock that consumer sales stink. Unemployed workers don’t buy a lot of widescreen TVs. And neither do folks who are worried about losing their jobs.

And apparently folks should be worried about losing their jobs: Just yesterday, President Obama as much as admitted that the “official” unemployment rate would soon move into double digits, and advised job hunters that their best bet would be to sit out this episode in two-year community colleges.

And the unofficial unemployment rate, which includes all the people that Washington has just plain given up on? It hit double-digits months ago.

And yet the Commerce Department tells us that “Retail Sales have risen more than expected!” Once again, you have the right to ask: “What the heck is going on here?”

Smoke and Mirrors

It’s simple, really: They are lying. Okay, not quite lying. Just hiding the truth under a bucket of garbage numbers.

First off, there is the actual increase: It’s 0.6%, my friends. Which is indeed higher than the 0.4% they claim to have expected. But even that paltry gain is bogus.

What went up in June were gasoline sales – by the dollar, as against unit sales – because the price of gas at the pump rose more than 10%.

Retail sales at general merchandise stores actually fell 0.4% in June!

No Means No

Again, not gains, but rather, losses.

And yet the entire retail sector is up more than 7% on this “news.”

All of these genuine facts (as compared to the smoke Washington and Wall Street are blowing up your skirts) simply address the second “NO” I mentioned at the beginning of this column, as in “no”, we are not the ones who are understating the troubles our economy is facing. Not by a long shot.

The Breakout That Never Happened

Now I would address the idea that this rally has been some kind of huge break out. I have to admit that I gave great credence to the Head and Shoulders pattern that had built up in the Blue Chips. It took an amazing amount of propaganda (I’m trying to be polite here) to forestall the breakdown that formation predicted.

But smoke and mirrors can only take us but so far…

View Larger Image

As you can see from the chart above, the S&P 100 (OEX) – which is truly one of the best measurements of both the U.S. economy and stock market – remains thoroughly stuck in the same old rut it has occupied since early May.

“In Flanders Fields”

This is old-school trench warfare, a grinding battle between haggard bulls and stubborn bears that cannot be won with happy slogans and bogus “progress reports.”

All such falsification of the facts does is induce the sort of “wisdom gaps” I have spoken of both in this column and in others, gaps that simply beg traders to step in and play the inevitable downside when reality gobsmacks the gullible masses.

Shorting any one of the aforementioned sectors via SPDR sector puts could easily make you triple-digit gains when it all hits the fan. Beyond that, there are of course, individual stocks such as Sears (SHLD:NASDAQ), Morgan Stanley (MS:NYSE) and even Intel (INTC:NASDAQ) that could be played short for significant gains.

Yeah, that’s right: I said to short Intel: As of yesterday afternoon, that gap up was forming up an “Evening Star Doji,” a sell sign if ever there was one.

Sincerely yours,

Adam

P.S. I suppose you’d like some predictions as to exactly when that stalemate will break and what will happen when it does. I am working up some charts on that now, but quite frankly, a detailed discussion of same will have to wait for the Chicago conference in August.

For those of you who can’t make it (seating is always quite limited at these affairs), we may be able to wrap the whole session up into some kind of special report. I’ll chat up the Powers-That-Be and see what I can do for you.

Other Related Topics: Economic Growth , Editor Adam Lass , Recession , WaveStrength Options Weekly

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